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A surge in pipeline capacity for natural gas in the U.S. Northeast this year and next
is expected to boost profits for producers and help hold down prices for Midwest and
East Coast buyers.

The $13.8 billion infrastructure build-out involves seven large pipeline proposals
that will take gas in all directions. Producers in the Marcellus Shale region—primarily
in Pennsylvania, West Virginia and eastern Ohio—are eager for the pipelines because
they have been hurt by depressed prices in pockets of inadequate pipeline infrastructure,
compounded by a nationwide two-year slump in gas prices.

Gas producers in the region are likely to see substantial increases in profitability,
said Andrew Weissman, the head of EBW Analytics Group and an attorney who specializes
in energy practice at Pillsbury Winthrop Shaw Pittman LLP in Washington.

Pitfalls in Pipeline Paths

The Federal Energy Regulatory Commission, with regulatory authority over interstate
gas transmission, has approved five of the seven large proposed pipelines for moving
gas out of the Appalachian region, which includes the deeper Utica Shale underlying
the Marcellus Shale. FERC decisions are not necessarily the last word, however.

“There are all sorts of relatively minor approvals that have to be granted for the
pipelines to be completed,”
Weissman told Bloomberg BNA, referring to such things as approvals for clearing trees
along the routes.

Some landowners have tried to block pipelines to preserve their trees. Environmental
activists also have strongly opposed the pipelines. Ample supplies of gas holding
down prices can discourage competing wind and solar projects that don’t produce the
carbon emissions causing climate change. The new pipelines also could spell more trouble
for operators of electric power plants that rely on coal and nuclear energy in competitive
wholesale power markets.

“We are opposed to all fracking and fracked-gas infrastructure,” said Lee Stewart,
an organizer for the group Beyond Extreme Energy. In fracking, or hydraulic fracturing,
layers of rock are fractured to allow gas or oil to flow to a well.

Opposition also can come from states, as the backers of the Constitution Pipeline
project discovered.

Constitution Pipeline Stalled

The Constitution Pipeline, proposed by four companies including an affiliate of pipeline
company Williams Cos. Inc., was approved by FERC in 2014 but blocked in 2016 by the
New York State Department of Environmental Conservation, which refused to give it
a Clean Water Act Section 401 water quality certification.

The Sierra Club applauded the decision. Roger Downs, conservation director for the
environmental group’s Atlantic Chapter, said in a statement at the time that FERC
pressured states to accept gas infrastructure projects, and that he hoped others would
push back. (The Sierra Club has received funding from Bloomberg Philanthropies, the
charitable organization founded by Michael Bloomberg, the majority owner of Bloomberg
L.P., parent of Bloomberg BNA.)

The opposition came despite the trend of gas-fired power plants displacing coal-fired
power, which is more carbon intensive and contributes more to climate change.

The state’s decision “blocks millions of northeastern consumers from accessing lower-cost
energy while ultimately slowing the region’s capabilities in transitioning from coal
and fuel oil to natural gas,” said Constitution Pipeline Co. LLC in announcing its
decision to go to court.

The fate of the project awaits a decision of the U.S. Court of Appeals for the Second
Circuit (
Constitution Pipeline Co. v. N.Y. Dep’t of Envtl. Conservation, 2d Cir., No. 16-1568, 5/16/16
).

Market Stability Anticipated

Gas prices are depressed wherever transmission constraints trap the commodity, creating
a local glut. At some trading hubs in the Marcellus Shale region, wholesale gas prices
in 2016 dipped below
$1 per thousand cubic feet while prices were above $3 at Henry Hub, the Gulf Coast
trading location most commonly used as a reference.

Richard Porter, a Houston-based senior managing director at FTI Consulting Inc., spoke
to Bloomberg BNA about the value of pipeline projects to producers.

“It provides them a surety of market and revenue stability. It provides them with
the cash flow they need to fund their exploration programs,” Porter said.

People have been bidding as much on the available pipeline space as on the commodity
itself, he said, indicating the transportation costs have at times been as much of
a market factor as the value of the gas.

Extra capacity should help stabilize the prices of gas, the cost of moving the gas
and the cost of power generated from gas, Porter said.

Rush of FERC Approvals

FERC approved one big Marcellus gas pipeline in January and three more in the first
week of February. Any more approvals must await the appointment of at least one more
commissioner so that FERC can have a quorum.

The Atlantic Sunrise project received one of the approvals. It will include upgrades
to existing lines that can be completed in 2017 and 183 miles of new pipeline set
for completion in the middle of 2018. Williams, lead backer of the Constitution Pipeline,
operates the Transco system, one of the largest gas pipeline networks in the United
States.

TransCanada Corp., operator of the Columbia gas pipeline network, another of the largest
gas systems, received approval for the Leach XPress pipeline but must await the appointment
of a commissioner for its Mountaineer XPress project.

National Fuel Gas Co. received approval for its Northern Access pipeline to run north
through New York.

Biggest of all in the new spate of approvals is Rover Pipeline, an Energy Transfer
Partners L.P. project. It would cost $4.2 billion and be capable of moving as much
as 3.25 billion cubic feet a day (Bcfd) of gas into the Midwest with connections that
also could take the gas east, south and into Canada.

Also waiting in the wings is Nexus, a project backed by pipeline company Spectra Energy
Corp. and DTE Energy Co., a Michigan utility. Enbridge Inc. completed its acquisition
of Spectra Energy Feb. 27.

Appalachian Gas Supply Soaring

The seven projects, if built, will add up to 11.79 Bcfd of capacity coming on by late
2018. There seems to be no worry that the fast-growing output of the Marcellus and
Utica shales can make use of it all.

“The Marcellus is poised for 19.1 Bcfd of production in March, and the Utica is expected
to reach 4.2 Bcfd,”
said Ken Ditzel, managing director of FTI Consulting’s Economic Consulting segment,
in an emailed response to questions.

As tracked by monthly production data, Marcellus output has been increasing at an
annual rate of about 6 percent, while Utica production has been growing at a 12 percent
annual rate, he said.

“I see no reason for those growth rates not to continue into 2018, at a minimum, as
more pipeline capacity comes online and producers continue to increase productivity
and lower costs,” Ditzel said.

There are no other U.S. regions where such a big gas infrastructure expansion is coming,
Porter said.

Gas Demand Rising Rapidly

Growing demand for natural gas has been driven especially by its use as a generating
fuel for electric power. Air emission regulations have combined with low prices to
favor gas over other power sources, especially coal.

It has become more economical to replace coal-fired power plants with gas-fired plants
rather than rebuilding the coal plants to cope with air regulations, Porter said.

The last two years of low gas prices have been hard on gas producers and competing
power sources alike. In 2015, U.S. electricity generation from gas exceeded generation
from coal, and in 2016 that advantage for gas increased, after decades of coal dominance
in generation.

More gas-fired power plants are being built. The Energy Information Administration
(EIA) said in January the electric power industry planned to increase gas-fired generating
capacity by 11,200 megawatts in 2017 and 25,400 megawatts in 2018, resulting in capacity
8 percent higher than at the end of 2016.

Plans to export liquefied natural gas also are expected to be important demand factors.
The EIA forecast a surge in LNG export capacity from the Lower 48 states to 9.2 Bcfd
by 2021 from the current 1.1 Bcfd. All current U.S. export capacity outside of Alaska
is at the Sabine Pass LNG terminal of Cheniere Energy Inc.

Brenda Shaffer, a senior fellow at the Atlantic Council Global Energy Center, cautioned
that it remains to be seen how much of a market will be found for U.S. exports of
LNG. It also remains to be seen what form the market will take, in terms of long-term
contracts or spot-market trading, she said at a Middle East Institute discussion Feb.
28 in Washington.

‘Turned Upside Down’

The expansion of gas production in Appalachia also has revised the pattern of U.S.
gas movement. For decades the flow was northward and eastward from Gulf Coast and
Southwest producing areas, but that is changing rapidly.

Over the last five years, the Transco pipeline system operated by Williams has been
receiving more gas from Pennsylvania than the Gulf Coast region, said Chris Stockton,
a Transco spokesman.

“In a way things have been kind of turned upside down,” Stockton said.

The Atlantic Sunrise project will help take Pennsylvania gas south or northeast by
linking to Transco mainlines. One of the customers lined up for gas through Atlantic
Sunrise is Southern Co. for power generation in Alabama, Stockton said.

Companies lined up to move gas on Atlantic Sunrise are a mix of gas producers and
utilities. The producers include Cabot, Chief, Southwestern, Anadarko Petroleum Corp.
and the Seneca Resources subsidiary of National Fuel Gas. The MMGS Inc. gas marketing
affiliate of Japanese conglomerate Mitsui & Co. Ltd. is another customer.

Not all pipeline companies disclose customer names. TransCanada would only say its
Leach XPress and Mountaineer XPress projects are underpinned by long-term fixed-fee
transportation service agreements.

Trump Nominations Needed

The Trump administration’s interest in accelerating infrastructure development may
be a relatively unimportant part of the near-term picture, given that five of the
big Appalachian gas pipeline projects already have FERC permits and the other two
are far enough advanced that they may need only a FERC quorum of commissioners to
win approval.

The situation might have been more complicated if Hillary Clinton had won the presidency,
Weissman, the EBW Analytics Group leader, said. The Obama administration had been
edging toward requiring FERC, in its environmental assessments of projects, to calculate
a gas pipeline’s indirect contribution to greenhouse gases because it facilitates
fossil fuel production and consumption, he said.

Clinton might have gone farther in that direction, but Trump will not, Weissman said.

To contact the reporter on this story: Alan Kovski in Washington at
akovski@bna.com

To contact the editor responsible for this story:
Larry Pearl at
lpearl@bna.com

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